At Prospector Partners, our investment team focuses on a clear objective: maximizing risk adjusted performance while always considering the potential downside first. We are also cognizant of the fact that different clients have differing needs, and objectives, and thus will choose to compare performance to varying benchmarks. We believe that, as long as we are measured over a reasonable time frame (preferably over an economic cycle), we are less concerned about which benchmark is used.

We tell both clients and prospects we are “benchmark agnostic.” This blog summarizes why we believe that is beneficial for us, and our investors.

First, no index is perfect

One of the reasons we are benchmark agnostic is that at any point in time, major equity benchmarks can have issues. We’ve written about some of these in the past, but as an example, roughly a third of companies in the Russell 2500 Value Index were unprofitable at one point this spring.

Index concentration is another issue. Well-known indices such as the S&P 500 have become overly concentrated in a few large-cap technology companies, which we view as risky for investors.

We also manage portfolios with high active share and a high degree of independence from major indices.

Second, you shouldn’t pay someone to look like an index

At the end of the day, we’re bottom-up stock pickers. And frankly, this is what we believe investors should pay for.

We readily acknowledge that investors can buy passive exposure to an index cheaply. Active strategies should look considerably different from an index, and that’s what we offer.

By staying agnostic to a specific benchmark, we are less constrained in how we construct our portfolio. For example, we don’t have to keep our sector weightings in line with a specific index to limit the amount of active risk we are taking relative to it.

This has allowed us to concentrate our efforts on finding the best opportunities available – regardless of sector. It has also allowed us to be overweight sectors such as financials, where we have the most expertise and have consistently found attractive investment opportunities over time.

What are we really concerned with?

More important to us than the index we are benchmarked against is the timeframe in which we are given to beat it. Given our focus on downside risk mitigation, our investment strategies tend to shine when stocks are volatile and the market environment is more challenging. Give us a long timeframe that includes a difficult market to navigate and we like our odds … against any benchmark you choose.